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What do you want – fee growth or more profit?

Spring is in the air and perhaps now is the time to be dusting down your finances and making sure that everything is set to go to make 2015/2016 a really profitable year. As the legal world evolves, it remains really important to benchmark your performance against that of similar sized firms. I would encourage you to look at the 2015 annual financial benchmarking report issued by Nat West which can be found at http://www.nw-businesssense.com/financial-benchmarking-law.html . As the author of the report, it is reassuring to see that profits have risen in the past year on the back of rising fee income. Hopefully this trend will continue into this year too.

One possible concern, highlighted in the report, is that the percentage growth in profits is matched by a similar percentage growth in fee income. In other words, firms are failing to maximize the existing capacity of fee earners before recruiting new staff. One would have expected that when growth returned to the sector that a larger proportion than normal of the growth would have gone straight to the bottom line. It would be a shame if this growth did not result in a step change in profitability in your firm.

Focus on fee earner profitability before recruitment

The financial benchmarking report highlights that while fees per equity partner have risen strongly, the fees per fee earner figure has barely changed. In other words, the additional demand is being dealt with by new fee earners rather than by improving the productivity of existing fee earners. It is always more expensive to recruit and pay new people than it is to develop the productivity of your existing fee earners. Also, would you really prefer to recruit new people instead of developing the fee earners who have shown loyalty to your firm?

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Perhaps all firms should therefore stop further recruitment until productivity per fee earner reaches a certain level? This can be measured as fees per fee earner or by setting a target for fees as a multiple of fee earner salary costs. The traditional view has always been that a good fee earner should generate three times their salary cost but this will only be achieved if they are working hard and are productive.

Improving fee earner productivity

Improving productivity is about helping fee earners to work smarter rather than harder. This is achieved through a combination of things including the following:-

Investing in technology to streamline processes involved in the running of matters;

Capturing knowhow in such a way that it is more easily shared with everyone and becomes more accessible to junior fee earners when working in new areas;

Training fee earners to run matters in a more efficient way with more emphasis on the need to plan matters rather than just working in a reactive and often chaotic manner;

Identifying ways of measuring productivity and providing regular feedback to fee earners so that they can see the benefit of the changes being made; and

Providing financial incentives to fee earners who can increase their productivity.

It will be interesting to see next year whether this issue has been addressed or whether profits are continuing to rise at a lower rate than should be possible. You should maximise returns in periods of growth, because as night follows day, a more challenging environment will return later.

Robert Mowbray is one of the longest standing and most widely known trainers of professionals having worked in and with law, accounting and other professional organisations for over 25 years. He is renowned as a trainer in things “financial” and has considerable experience of helping lawyers to read financial statements and in helping professional firms to increase profitability through more efficient and effective working practices.
Taylor Mowbray LLPrmowbray@taylormowbray.comTelephone: 07979 517221

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